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Broadcasting Services Amendment (Digital Television and Datacasting) Bill 2000

CHAIR —Welcome. The committee has received your submission, No. 12. Do you wish to make any alterations or additions to your submission?

Mr van Dyk —No, I do not.

CHAIR —Would you like to make a brief opening statement?

Mr van Dyk —Yes, I would. I think we have probably gathered from some of the discussions that we have heard today that there is a large amount of uncertainty about what the future holds. We at Philips would like to state that we are not anti-high definition. We are certainly not anti-new technology. Our approach has been one of trying to ascertain just what the evolution of digital technology, but particularly digital television, can mean, could mean or would mean to the Australian community. As such, we have tried to put together some of the issues. We think we have come up with some proposed answers, but they are certainly not all the answers because there are a lot of stakeholders.

The difficulty we have as a manufacturer of broadcast systems, television receivers and other consumer electronic items is that we are struggling to find an economic model out of the current proposed legislation that, in the near term, will see digital televisions being purchased by Australian consumers. That is not to say that digital television does not have a future. We are saying that, the way that the legislation looks and the way that the evolution is more likely to unfold, we do not see an economic model for ourselves that makes any sense.

The other issue that we struggle with is a compelling consumer proposition in the short term that has consumers wanting to actually access digital technology versus analog technology. That, to us, is a concern when we are trying to plan product production because, if we cannot find a consumer proposition, we find it difficult to convince our factories and our designers to put a product together. We do believe in digital technology; it is happening whether we like it or not. The world is picking up exceptionally quickly. We are a forerunner and player in this technology and we are obviously keen to have Australia enter the digital age. Our submission has attempted to cover some of those issues, and we are here to answer any questions you would like to ask.

CHAIR —Thank you. You certainly do have a very interesting submission. Senator Bishop.

Senator MARK BISHOP —You say you are struggling to find an economic model or a compelling consumer proposition for consumers to buy digital TV in the short term. What do you characterise as short term?

Mr van Dyk —Short term for us would be at least 2005. Our report states that we do not really believe that until 2008, when analog is switched off, there is to be a highly motivating, compelling argument for consumers.

Senator MARK BISHOP —So the compelling argument for conversion to digital as far as the consumer is concerned is when they black out the analog transmission. Is that right?

Mr van Dyk —It certainly leaves very little choice.

Senator MARK BISHOP —Did you hear the discussion earlier with Mr Branigan and in the morning concerning the take-up of HDTV and SDTV sets by consumers in the United States?

Mr van Dyk —We were here for Mr Branigan's discussion. We were not here for the morning session. I think we share some of the information, although it is probably different in the numbers.

Senator MARK BISHOP —Your submission says on page 3, the third paragraph:

Total 1999 sales (to dealers, not consumers!) of HDTV Set Top Boxes (STB's) was 21,992 units - official data from the American Consumer Electronics Association.

Do you have any update on those figures? Has there been any bend in the curve?

Mr van Dyk —I might hand over to Cyril Kosorok.

Mr Kosorok —The only update we can give you is the official press release from the American Consumer Electronics Association in which they update the 1999 DTV sales figures. They say:

According to new data released by CEA—

which is the Consumer Electronics Association—

17 per cent, or 24,631, of the 143,218 total DTV products sold in 1999, including monitors,—

which I assume would be computer monitors—

integrated sets and digital set-top box receiver decoders, were capable of receiving digital broadcasts.

That is about the only update that we have.

Senator MARK BISHOP —So the consumer take-up in the United States of the HDTV product is still absolutely minimal?

Mr Kosorok —Yes.

Senator MARK BISHOP —Mr Branigan offered an explanation that there were some technical deficiencies in the transmission side of things in United States. Did you hear his comments?

Mr Kosorok —Yes, we did.

Senator MARK BISHOP —In your mind, is his explanation relevant to Australia? Is the product so different in the US from that proposed in Australia that you cannot rely on the so low consumer take-up of the product in the United States?

Mr Kosorok —Technically the transmission standard in the US has got some problems. The US is working very hard to try and fix those. They have got the ATSC-AVSB transmission problem where they have unreliable reception. But we still believe that from the consumer perspective, regardless of whether the reception is unreliable or not, the uptake of high definition television has been very small due to lack of programming, with much up-conversion of their existing analog signal to digital, which has not created a very good impression to the consumer. We also believe that the pricing structure in the US is extremely high for high definition television. If we take the analogy to DVD, for instance, DVD offers standard definition pictures and it has been a roaring success in the States.

Senator MARK BISHOP —That is interesting. You manufacture in Australia, don't you?

Mr van Dyk —No, we don't. We import.

Senator MARK BISHOP —Have you done any studies of what consumers are looking for in this new market?

Mr van Dyk —Not in the new digital market because the research would be difficult to establish. The only way we could do it is in groups. Until the content is revealed and we really nail down the benefits we would be offering, it is a difficult piece of research. We would say that today in the television market as it exists for receivers, the market is reasonably segmented into value for money, design and technology.

Senator MARK BISHOP —How big is the technology market?

Mr van Dyk —Relatively small.

Senator MARK BISHOP —Mr Encel this morning argued that a lot of the additional services that came with digital TV were not of such value to consumers that would persuade them to spend many thousands of dollars to purchase an HDTV receiver. Do you share or disagree with that view?

Mr van Dyk —I think in principle we would share the view that there may not be enough benefit coming down the line in the near term of a digital nature to motivate the consumer to invest in new televisions.

Senator MARK BISHOP —Apart from making it de facto mandatory when we turn off the plug in 2007 or 2008, there is insufficient incentive for consumers in that period, from now until then, to fork out the several thousands, in your view?

Mr van Dyk —We think so. The dilemma that we have struggled with ourselves is that great picture, great sound in itself may not be the motivator that we think it is. Our experience internationally, looking at other markets, would suggest that content, interactivity, is probably, in true terms, a benefit that is not received today that consumers would find motivating.

CHAIR —You said that in the short term the future for the HDTV did not look terribly attractive. What about the long term? That was the point that FACTS raised—that in the long term the situation might change dramatically.

Mr van Dyk —One of the issues that we have as a technology player is that we are as much in the dark as to the long term of the technology as most people in this room. What we think is impossible today some bright spark in our research lab creates tomorrow. We believe that high definition has the potential long term to be configured in such a way that maybe it does not eat up as much spectrum. Maybe there are transmission methods where it can be more efficient. Certainly, it would then offer a better economic model. Our belief is that high definition television, or high definition transmission, is reality. It should be considered from a long-term point of view, and we have done that, but it has some short-term ramifications in that it will not, to Australian consumers, seem as if much has changed at all unless we revisit some of the boundaries that we have set.

CHAIR —Very early in your submission you say:

The way forward for Digital Television in Australia that enables broadcasters, datacasters and television receiver manufactures to meet government objectives is to remove the HDTV mandate, adopt Standard Definition TV with MPEG audio and allow multi-programming.

To come back to the audio, both FACTS and Dolby, of course, have suggested Dolby would be a better system for audio. Why do you suggest MPEG?

Mr Kosorok —MPEG is already being used for digital satellite throughout the world. Every country that uses DVB-S is using MPEG audio and every country that is using DVB-C, which is the cable variety, is also using MPEG audio. Our view of MPEG audio for digital television for terrestrial is from the viewpoint that if we mandate or say that we need to have AC-3 for television for Australia only, that would then preclude Australia from sourcing product from other countries that are not using AC-3 products to be used in this country, because as soon as they try and use the VCR, that is a digital VCR that has not got AC-3 in it and it will not be able to be used in this country. That will add extra costs and production issues just for Australia's small market.

We feel at the moment that MPEG does not take up a very big data rate in the atmosphere. It takes up approximately 192 kilobits, which will give stereo sound as well as surround sound if it is connected up to a Dolby Prologic system. We feel that in that instance we should be encouraging as many varieties of digital television product to come to Australia that require the least amount of modification to encourage the whole digital take-up process.

CHAIR —One of the other submissions I read suggested that Dolby might be more adaptable to technological innovation, that there might be more opportunity in due course for improved sound quality and so on with the Dolby type of service. Is there a case for having a choice arrangement where you have MPEG or Dolby?

Mr van Dyk —We have absolutely no objections to the transmission of AC-3 provided that, as we have an SD Must Carry, we also have an MPEG audio Must Carry with the SD so that consumers who have made a choice and do not wish to have AC-3 in their particular reception product still get sound when they are using that product and other users who have decided that they want to have the home theatre experience with 5.1 channels can go to the store and purchase that particular product, which is exactly what a broadcaster in Germany is doing currently. He is offering a simulcast audio service for AC-3 and MPEG at the same time via satellite free-to-air television.

CHAIR —Your multiprogramming that you refer to is presumably multichannelling.

Mr van Dyk —Yes, that is correct.

CHAIR —You must operate very much in the European market, one presumes.

Mr van Dyk —We do but we also operate in the US market.

CHAIR —In Europe they have standard definition largely with multichannelling.

Mr van Dyk —Exclusively, there is no HD in Europe.

CHAIR —Thank you very much.

Senator BOURNE —How early and under what optimal circumstances would Philips be able to make available set-top boxes and televisions in Australia after this legislation is passed and the broadcasters start broadcasting?

Mr Kosorok —It would mostly be dependent on the consumer uptake. So if we accept that Australia sells between 800,000 to 1 million televisions a year, you would need at least five per cent to 10 per cent of the market to have an uptake to warrant the investment. So there is a significant amount of uptake that you need before you can do a production run that makes any sense, otherwise the price you have to pass on to the consumer becomes quite horrific. Even taking into account the fact that most of us would subsidise early sets, as most manufacturers do, we would then need a very quick uptake to reinforce the ongoing production. Most of us make product in global plants. We compete for space in those global plants. Therefore, the Australian demand for particularly digital television would need to be significant enough to make a blip on the Richter scale.

Senator BOURNE —Does that mean though that we are likely to see absolutely no product in Australia until it is turned off or no product for five years? This could be pretty significant if there is going to be no hardware available.

Mr Kosorok —I think that is our concern and our vested interest is quite simple. We manufacture television product. Our concern is that if there is not a market then it is likely that little product will be brought in. Our expectation is that set-top boxes will probably come well before integrated digital television sets. How that set-top box is delivered to the consumer is a critical issue to the uptake. If you look at some of the European and UK models, you will see that there are subsidised boxes, a little like telephones—you sign your life away and you can get it for very little or nothing.

That is a model that can work if the broadcasters have done their homework and they have the numbers of consumers signing up. So set-top boxes would be the most likely answer. If they are not subsidised, they will be at a high price. At some of the prices we have worked on, we believe there still would be a barrier to entry, with consumers saying, `Okay, now that I have a set-top box that converts digital signal, what am I actually getting?' If it is an excellent picture of what I receive today, excellent picture and sound has to be a real driver for that consumer. We as a company do not believe best picture and best sound is necessarily a proven driver of consumer behaviour.

Senator BOURNE —So you think it is the interactivity, the datacasting and the multichannelling—the extra things that you cannot get now—that are going to push it?

Mr van Dyk —Yes.

Senator BOURNE —Where would you see the price being for a set-top box, for instance, next year? How fast do you think that would fall?

Mr van Dyk —Unsubsidised, we believe a standard definition television box with MPEG audio would be somewhere around $850 to $1,000.

Senator BOURNE —Is there any other sort of set-top box that you would be able to adapt quickly to an Australian market from somewhere else where you manufacture?

Mr van Dyk —It does depend on the specifications that end up coming down the line. If our boxes are unique and distinctly different to boxes we make for other parts of the world, it puts the price up. If they are similar in specification, it makes the job of getting the box here much easier and lowers the cost of the box.

Senator BOURNE —What would a similar one be? What sorts of specifications would you be looking at for something similar, say, to Europe?

Mr Kosorok —The UK box would be very similar to Australia's, except that it is seven megahertz instead of eight megahertz, and there are a few other minor changes. Our calculations are that that box is the same box that we will be bringing to Australia with modifications, and it will be between $A850 and $A1,000.

Senator BOURNE —So the modifications would not be that big, and it could be available reasonably early in the cycle of things. Do you have a view on the timing of the review of whether there should be HD quotas at all—and whether HD is able to disappear altogether—in 2003?

Mr van Dyk —As long as there is a standard definition option and access by consumers, we are quite happy for the review of HD television. In the long term, HD television is a reality. We believe the technology will move over time, but today we cannot predict how good or how much added value we can build into high definition television. But it absolutely has a right to exist and, therefore, the review has a right to be there.

Senator BOURNE —Thank you.

[4.43 p.m.]